The normal procedure for business transactions follows the tried-and-true method of selling a product or service and recording the income. The income earned is taxable as earned income. Rather than use the traditional approach, many individuals and businesses may decide to barter their products or services.
Did you know that good business practice would suggest that you treat all barter and internet transactions as you would normal business transactions? If you ever face a CRA audit,
it will help spare your corporation, proprietorship or partnership the inconvenience of a long, laborious tax audit and potential penalties and interest – or even being convicted for tax evasion.
Bartering occurs when individuals conduct a transaction for goods or services without using a recognized medium of exchange such as money. Undoubtedly, most sellers who involve themselves in barter transactions are unaware that they are required to report the value of the transaction. And, there may be some who use bartering to circumvent corporate or individual income tax and HST.
When bartering transactions occur in the normal course of business, there are effectively two transactions that must be considered:
- The first transaction is the value of the service or product that is provided to the customer. For example,
if your business sells bricks, the value of those bricks should be included in the seller’s business income. Further, the HST/GST and PST (if applicable) must be added to the value assigned to those bricks, then it should be reported and submitted.
Note that this assumes that the individual providing the product or service has already reached or surpassed the small supplier threshold of $30,000 with sufficient “conditions.” You can review these requirements on the CRA website.
- The second transaction to record is the assigned cost to the goods or services received in exchange for the product you have provided. Assuming that the person or business with whom you are bartering is an HST/GST registrant, it may be possible to record and claim the Input Tax Credit (ITC). If that provider does not provide their HST number, you will have to record the assigned cost as an expense and cannot claim the ITC.
There may be situations when the barter transaction may be considered the sale of a capital property. In this case, the transaction may give rise to a capital gain. Your CPA will be able to provide guidance on these transactions.
Bartering has been around since before the advent of currency, but the ability to barter has been enhanced and overshadowed with the advent of the internet, providing access to millions of opportunities to not only barter but also to sell goods or services.
For those who have used the internet to conduct what may be construed as business transactions – whether innocently or intentionally – the CRA believes that there are enough transactions not being reported that are negatively affecting its treasury.
Consider that the CRA court-ordered eBay Canada to release the following account information and sales data of Canadian residents who conducted transactions on its online selling site:
- sales of more than $20,000 and at least 24 sales transactions in any of the calendar years 2006, 2007 or 2008, (irrespective of membership in eBay’s PowerSeller program), or
- sales of more than $100,000 in any of the calendar years 2006, 2007 or 2008, regardless of the number of sales transactions.
Given this court order, any Canadian-resident eBay seller who meets these sales thresholds will have the following information released to CRA: full name, user ID, mailing address, billing address, telephone number, fax number, email address, and the selling prices (high bids) of the items.
If your transactions meet the above criteria, a wise business decision would include contacting your local CPA and determining the need for voluntary disclosure to prevent penalties and interest, should the CRA carry out an audit.
The following information is required for voluntary disclosure:
- name, social insurance number (SIN) and date of birth of each member of the family
- if a business, the names of the principals of the partnership or the shareholders of the corporation, along with their SIN.
- the last personal tax returns that were filed for the individual and family members
- the date that the eBay business started
- if the business is a sole proprietorship, partnership or corporation: the business number
- for a corporation, the articles of incorporation and the provincial corporate tax number
- Financial statements, whether for incorporated companies or for sole proprietorships or partnerships, should be available to establish whether eBay income was reported when filing returns.
- Tax returns should be available to support the financial data that indicates whether eBay income was reported.
- For corporations or sole proprietors that are registered for GST/HST, all returns filed with the CRA from the date eBay transactions began should be made available. (If the taxpayer exceeded the threshold for registering, the CRA may retroactively register the corporation or individual.)
- bank accounts showing all transactions through platforms such as PayPal
- Sales income and expenses that may offset recorded income and therefore affect HST/GST/ITC should be made available. Expenses that may be allowable are those that are necessary to earn income. (It is advisable to review your expenses with your CPA.)
The court order issued to eBay defined the time frame for the information that the CRA was seeking to audit. Canadian taxpayers should not conclude that they have avoided an audit because they have not received a notice of audit.
If your eBay account meets the criteria discussed above, contact your CPA and discuss the possibility of submitting information to the CRA under the Voluntary Disclosures Program (VDP).
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.